ABA Tax Section, Foreign Lawyers Forum Report 2009
NEW ZEALAND DEVELOPMENTS OF INTEREST TO INTERNATIONAL TAX LAWYERS – TO DECEMBER 31, 2009
This report is made for the purposes of the Tax Section of the American Bar Association’s Foreign Lawyer’s Forum. It summarizes a number of developments in New Zealand tax law and practice that may be of interest to lawyers assisting clients doing business with entities or individuals in New Zealand, or lawyers wishing to be informed generally of tax developments in New Zealand.
The report is divided into the following sections:
(a) Legislative changes
(c) Determinations, Rulings and Statements
(d) International Agreements
2. Legislative changes
This section of the report summarizes the major legislative tax changes which were enacted in 2009. Legislation passed in 2009 included the following:
(a) Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 – This legislation was assented to on 6 October 2009 and most notably included changes to the rules for taxing controlled foreign companies (“CFCs”) and foreign dividends, a new tax credit for payroll giving and new definitions of “associated persons” in the tax legislation.
(b) Taxation (Business Tax Measures) Act 2009 – This legislation was assented to on 30 March 2009 and gave effect to changes which are intended to help smaller businesses deal with the economic pressures faced as a result of the economic downturn. The new rules generally either apply from the 2010 income year or from 1 April 2009. The measures introduced were part of a wider package of relief measures aimed at helping businesses' cash flows and reducing the amount of time that small and medium enterprises need spend on their tax obligations. The changes included reducing the number of tax returns and payments that such enterprises have to process.
(c) Taxation (Budget Tax Measures) Act 2009 - This legislation was assented to on 29 March 2009 and gave effect to budget announcements to close the KiwiSaver mortgage diversion facility to new applicants from 1 June 2009. The mortgage diversion facility was a feature of KiwiSaver that allowed members to divert up to half of their personal contributions to their mortgage repayments. It also repealed the planned personal tax cuts planned for the 2010-11 and 2011-12 income years, and the associated increase to the independent earner tax credit, due to the difficult fiscal climate.
2.1 Changes to New Zealand’s CFC and foreign dividend rules
The Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 introduced new rules for the taxation of foreign companies controlled by New Zealand residents and for foreign dividends received by New Zealand companies. The new rules apply for all income years beginning on or after 1 July 2009, and represent a fundamental change to how New Zealand taxes offshore income earned through controlled foreign companies (“CFCs”). Previously, New Zealand residents were taxed on their share of all income earned by CFCs as that income accrued but with the following two exemptions:
(a) The “grey list” provided an exemption from accrual taxation for CFCs based in one of eight listed countries (Australia, Canada, Germany, Japan, Norway, Spain, the United Kingdom and the United States).
(b) Conduit tax relief provided an exemption from accrual taxation for a New Zealand company with an income interest in a CFC to the extent that the New Zealand company was owned by non-residents.
Those exemptions are now replaced by an exemption for the active offshore income of CFCs. The changes also introduce an exemption from tax for most foreign dividends paid to companies and measures to protect the tax base as a result of adopting an active income exemption.
The purpose of these reforms is to bring New Zealand’s tax rules into line with the law in other countries, and to help New Zealand-based business to compete more effectively in foreign markets.
2.2 Payroll giving
A new voluntary payroll-giving scheme has been available from 7 January 2010. The scheme provides a tax credit for gifts of money that are deducted from an employee’s pay through his or her employer’s payroll. The scheme enables employees to receive an immediate tax credit each pay-period and eliminates the need to collect and keep receipts to claim the tax relief at the end of the year. The scheme operates in addition to the current end-of-year donation tax credit claim system.
2.3 New ‘associated persons’ definitions
The definitions of “associated persons” in the Income Tax Act 2007 have been reformed. The relevant definitions are mainly used in an anti-avoidance capacity to counter non-arm’s length transactions that could undermine the intent of the income tax legislation. The reforms addressed weaknesses in the previous definitions that posed a risk to the tax base. The tests of association in the new associated persons definition in subpart YB are as follows:
• two companies;
• a company and a person other than a company;
• two relatives;
• a person and a trustee for a relative;
• a trustee and a beneficiary;
• trustees with a common settlor;
• a trustee and a settlor;
• a settlor and a beneficiary;
• a trustee and a person with the power of appointment or
• removal of the trustee;
• a partnership and a partner; and
• two persons who are each
The main changes include:
(a) New tests in relation to trusts that focus on a trust’s settler;
(b) More robust rules aggregating the interests of associates to prevent the tests relating to companies being circumvented by the fragmentation of interests among close associates;
(c) A tripartite test associating two persons if they are each associated with the same third person, thereby making the associated persons tests as a whole more difficult to circumvent.; and
(d) The ambit of the relatives test has been reduced from four to two degrees of blood relationship.
2.4 Non-disclosure right of “tax advice documents”
The right of non-disclosure in sections 20B to 20G of the Tax Administration Act 1994 (“TAA”) has been amended to allow the right to apply to documents that the Commissioner has sought to be disclosed during litigation. The amendment allows the Commissioner to have access to the facts (the tax contextual information), but not to the tax advisor’s view of the facts. Previously, the ability of the Commissioner or a taxpayer to challenge the claim that a book or document is a “tax advice document” subject to the non-disclosure right was determined by a District Court Judge. As this has created difficulties, a further amendment has been made to allow the determination to be made by the court hearing the matter.
2.5 Corporate reorganizations not affecting economic ownership
A new section, section YC 18B of the Income Tax Act 2007, has been enacted to ensure that shareholder continuity is preserved for certain restructuring arrangements that do not result in a change of economic ownership to a group of companies. The preservation of shareholder continuity will ensure that no unintended consequences of the continuity rules will arise in respect of imputation credits and losses as a result of the restructuring. The change was a result of some Australian banking groups with significant New Zealand operations considering restructuring to separate their banking business from their other businesses. The restructuring results in the Australian bank replacing its initial parent company with a new company as the listed banking group parent company, and this particular type of restructuring fell outside of the requirements of existing concessions. The main criterion for the new concession is that restructuring results in no significant change to the ultimate economic ownership of the initial parent and all of its subsidiaries.
3.1 Discovery by Commissioner
RadioWorks Limited v Commissioner of Inland Revenue; TVWorks Limited v Commissioner of Inland Revenue was decided on 27 July 2009. The case confirmed that the Commissioner of Inland Revenue is entitled to discovery in tax litigation, notwithstanding his powers under the TAA and the evidence exclusion rule. The court held that the jurisdiction is supplementary to the information exchange provisions of the disputes resolution process, and observed that the Commissioner can be expected to have used his section 17 powers during the investigation, but there is no certainty that he will obtain all the relevant information this way. The court also held that section 138G of the TAA does not preclude discovery.
RadioWorks Limited v Commissioner of Inland Revenue; TVWorks Limited v Commissioner of Inland Revenue (2009) 24 NZTC 23,691
3.2 Scope of judicial review in tax cases narrowed further
Westpac Banking Corporation v Commissioner of Inland Revenue was decided on 20 February 2009 in the Court of Appeal. The taxpayer sought to argue the validity of assessments made by the Commissioner of Inland Revenue, arguing that they were invalid for a number of reasons. The Court of Appeal considered the statutory provisions in the TAA and held that truly exceptional circumstances must exist for judicial review action to be allowed in the context of tax disputes, an example of which given by the court was in cases of conscious maladministration.
Westpac Banking Corporation v Commissioner of Inland Revenue (2009) 24 NZTC 23,340.
3.3 Structured finance transactions held to be tax avoidance
Westpac Banking Corporation v Commissioner of Inland Revenue was decided on 7 October 2009. Between 1998 and 2000 Westpac entered into a number of structured finance transactions with foreign counterparties. The Commissioner considered the transactions constituted tax avoidance, and issued amended assessments to Westpac, which the High Court upheld. The judgment represents a helpful example of the practical implementation of the “tandem approach” to considering tax avoidance which is required by Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue  2 NZLR 289, where both the specific provisions and the general anti-avoidance provisions are given equal weight.
Westpac Banking Corporation v Commissioner of Inland Revenue (2009) 24 NZTC 23,834
3.4 Own home LAQC held to be tax avoidance
TRA Decision No 16/2009 was decided on 23 October 2009. The Court held that an arrangement whereby the taxpayer rented her residential home from a loss attributing qualifying company (“LAQC”) in which she was the sole shareholder was a tax avoidance arrangement. This was the first case of this type before the courts and provides authority that a taxpayer cannot use an LAQC structure to claim deductions for expenditure that would otherwise be of a private or domestic nature.
TRA Decision No 16/2009
4. Determinations, Ruling and Statements
The following interpretation statement is of interest:
4.1 Deductibility of fines and penalties
This interpretation statement contains guidelines that the Commissioner of Inland Revenue considers relevant in determining whether fines and penalties are deductible under the general deductibility provisions in section DA 1 of the Income Tax Act 2007.
In several decided cases, a deduction for fines and penalties has been denied either for failing the statutory nexus test or on public policy grounds. The statement examines the leading cases on fines and penalties with a view to determining the correct test or tests that apply in a New Zealand context. In some situations it will be clear that a breach of law (and therefore the associated fine or penalty) is too remote from the income-earning process to be deductible. However, the statement concludes that irrespective of whether the statutory nexus is met, fines and penalties are not deductible in New Zealand because of the application of public policy considerations. These are largely that fines and penalties are imposed to punish breaches of the law, and this deterrent aspect makes it undesirable for a fine to be deductible.
IS 09/01: Fines and penalties – income tax deductibility
The following public rulings are of interest:
4.2 Provision of benefits by third parties – fringe benefit tax consequences
This ruling addresses the tax treatment of a benefit received by an employee from a third party where there is an arrangement between the employer and the third party and where the benefit would amount to a “fringe benefit” if it had been provided by the employer. It provides that there will generally be an arrangement for the provision of a benefit to employees in the following situations (with limited exceptions):
a) consideration passes from the employer to the third party in respect of the benefit being provided; or
b) the employer requests (other than merely initiating contact), instructs, or directs, the third party to provide a benefit; or
c) there is negotiation or discussion between the employer and the third party that (explicitly or implicitly) involves the threat or suggestion that the employer would withhold business or other benefits from the third party unless a benefit is provided to the employees; or
d) the third party and the employer are associated parties, and there is a group policy (whether formal or informal), or any other agreement between the associated parties, that employees of the group will be entitled to receive benefits from the other companies in the group.
This Ruling was signed on 31 July 2009 and will apply for the period beginning on the first day of the 2008/09 income year and ending on the last day of the 2013/14 income year. It replaces Public Ruling BR Pub 04/05, which applied until 19 May 2007, and is not intended to differ from that ruling.
The following standard practice statements are of interest:
4.3 Compulsory deductions from a taxpayer’s bank account by the IRD
This Standard Practice Statement sets out Inland Revenue's practice on the use of statutory notices which are from time-to-time issued to banks requiring them to make deductions from their customers' accounts. The Commissioner of Inland Revenue has wide powers to require a third party to make deductions from amounts that are payable to a taxpayer who has tax arrears. The standard practice statement provides the following:
(a) Inland Revenue will not issue a deduction notice in respect of tax arrears that are the subject of an instalment arrangement between the taxpayer and the Commissioner.
(b) A deduction notice will apply to all deposits the bank receives from the day the deduction notice is received by the bank and will continue to apply until it is revoked or withdrawn.
(c) Deductions made by the bank are held in trust for the Crown until they are forwarded to Inland Revenue.
(d) If the deduction is not made by the bank, the amount required to be deducted is recoverable by Inland Revenue from the bank as if it were tax payable by the bank.
SPS 09/01 - Compulsory deductions from bank accounts
4.4 Voluntary Disclosures
This Standard Practice Statement applies to a voluntary disclosure that is made under sections 141G or 141J of the TAA for the purpose of entitlement to a reduction in any shortfall penalty imposed. It was issued partly as a result of increases in the reduction rate of certain shortfall penalties when a pre-notification disclosure is made. A taxpayer can make a full voluntary disclosure either before the taxpayer is first notified that a tax audit is pending or after the taxpayer is first notified of a pending audit but before the audit starts. Broadly, the standard practice statement provides guidelines in respect of:
(a) how to make a voluntary disclosure;
(b) when a taxpayer is treated as having been notified of a pending audit;
(c) what constitutes a full voluntary disclosure; and
(d) what rate of reduction will apply if a taxpayer is liable for a shortfall penalty.
SPS 09/02 Voluntary disclosures
5. International Agreements
New Zealand has a comprehensive regime of double tax agreements. During 2009 the following developments occurred:
• An amending protocol to the 1981 double tax agreement with Belgium was signed on 7 December 2009 and came into force by Order in Council on 5 July 2010. The protocol updated a number of technical areas to ensure the double tax agreement remains relevant to the tax laws in each country.
• A new double tax agreement between New Zealand and Singapore was signed on 12 August 2009 and came into force on 12 August 2010. The agreement replaces the previous agreement signed in the 1973. The new agreement allows for the full exchange of information on tax matters between the two countries, and is effective for withholding taxes from 1 October 2010 and for other provisions for income years beginning on or after 1 April 2011.
• A new double tax agreement between New Zealand and Australia was signed on 26 June 2009 and came into force on 19 March 2010. It replaces the 1995 agreement and is effective in New Zealand for withholding taxes from 1 May 2010 and for other provisions, generally from income years beginning on or after 1 April 2010. Features of the new agreement include lower withholding taxes on dividend and royalty payments between the two countries, and making pensions that are tax-free in one country also exempt in the other when the recipients move across the Tasman.
• New Zealand agreed tax information exchange agreement with St Christopher and Nevis, more commonly known as St Kitts, the Cayman Islands, the British Virgin Islands, Bermuda, Gibraltar, Jersey, the Isle of Man, Guernsey, the Cook Islands and the Bahamas in 2009. These are agreements New Zealand is seeking to establish outside of its DTA network.